Cost-of-Production insurance outlined

“You keep chasing and chasing and chasing it in the wind,” said Oswalt. “That’s what farming is like…boll weevil, worms, hail…it never stops…you never seem to stop spending money to try to make a crop.”

Farmers chase that elusive profit all alone, and Oswalt and his banker, Jimmy Givens of First State Bank in Abernathy decided farmers should have a safety net under them in the yearly chase.

They came up with the idea of a cost of production farm insurance concept, and the idea was rolled out to a group of farmers, bankers and insurance agents recently in Visalia, Calif. by a Texas consulting firm, AgriLogic, Inc., College Station, Tex.

The idea is simple, said Oswalt. “You buy insurance to protect your investment in cars and homes…it is the same idea in farming. You insure your cost of production to where the most you can lose is 10 percent.”

However, designing an insurance package to meet the vast differences in farming economics across the country is not simple, as Joe Davis, AgriLogic CEO found out at the Visalia meeting.

Nevertheless, he and California Cotton Growers Association chairman Dan Errotabere of Riverdale, Calif. are optimistic the challenge can be met.

“The program has merit,” said Errotabere who spent a year as chairman of the cotton grower’s association’s insurance committee working on developing the program.

Errotabere said existing federal crop insurance programs are designed to cover disasters and are ineffective or too costly for California producers. “We don’t have Texas style disasters where you lose everything, but we can lose 20 percent and bleed all over the place. We need to have some risk management against those kind of losses.”

It will be challenging to develop an economical cost of production insurance program, but Errotabere said it is imperative that it be done.

“Farmers in the West are struggling to stay in business because our working capital is disappearing,” he said. “A cost of production program is a risk management tool that could lower the cost of doing business.

“With such an insurance program, the risk of borrowing money would be offset and that could mean lower interest rates from banks,” said Errotabere.

The idea from Oswalt and Given has captured the imagination of the Coalition of American Ag Producers; Western Farm Credit; Ag First Credit Bank; Farm Credit Bank of Texas and the National Association of State Departments of Agriculture who are funding the development of the insurance package by AgriLogic.

Davis outlined the basic philosophy behind cost of production insurance: growers can insurance up to 90 percent of their documented costs in each of three categories: variable costs, fixed costs and land costs.

Each program would be tailed to the farmer’s specific needs.

“The idea is to keep the farmer in business…not guarantee a profit,” said Davis.

“This program is for the ‘true producer…not for the farmer who is trying farm a government insurance program,” said Oswalt. “It is for the producer who is trying to produce a crop.”

Davis said cost of production risk management would not replace any existing government insurance program. It will require the approval of the Risk Management Agency and other government agencies and acceptance by farm insurance providers.

A dozen crops are scheduled to be included in the first program package, including many California non-commodity crops like peaches, almonds, onions, stone fruit as well as wheat, rice, soybeans, corn and upland cotton, which Davis said is classified as a fast track commodity. Pima cotton is not included in the first wave of crops.

Davis hopes to have a package in place within six to eight weeks and ready for a pilot program in the six San Joaquin Valley cotton producing counties next season.

He admits that is an ambitious goal, but he is optimistic it will happen. However, he found that it would be more challenging after the Visalia meeting where he learned that it is fixed costs—specifically the cost and availability of federal and state irrigation water—that is the uncertainty needing cost of production coverage.

“I am not interested insuring against variable costs,” said Mark Borba or Borba Farms in Riverdale, explaining that for farmers in Westlands Water District and other water projects it is the uncertainty of water availability that is the biggest variable.

As growers detailed the complexity of farming with state and federal water in the West, Davis commented it would take “10 pages alone” in the insurance package to address Western water issues.

Davis estimated that the premium for a cost of insurance package would be from four to eight percent of the cost of production detailed by the producer. The cost will be based on the yield history of a farm weighted against county average yields and cost or production.

“A grower with a history of a lot of variability will pay a higher premium that one who has a history of sustainability,” said Davis.

Davis expects the federal government to pay 50 percent of the premium costs

To file a claim, farmers would simply have to account for all expenses and receipts in the three categories. Losses can be attributed to low yields, poor quality, low prices or any other factor. “This is a true safety net,” said Davis.

Davis said farmer gains or losses in hedging or purchasing options would not be a part of the insurance program in neither expenses nor gains.

While a loan deficiency payment would be considered income, other government payments (AMTA, disaster, counter-cyclical) would not be included on the income ledger.

There would be no controversial “optional” provision in this program like the current program, which has been the cause of abuses in the past. That was a foreign term to the Western producers.

Davis explained that that means a farmer under current program can divide a section or land or a portion of his farm. “What this means is that the farmer farms three-fourths of his farm and collects insurance on one-fourth. They can make a lot of money on three parts and collect insurance on the other.”

Davis said under the proposed new insurance program, farmers insure farms separately and design programs to fit each farm.

Davis does not expect this program to escape abuses like those with current programs, but he said it “those who want to abuse it will have to work harder,” he said, adding that farmers in some parts of the country are being jailed for abuses of the current program.

Abuses were not the issue with the California producers or lone Texan in the room. Survival is and making sure the program fits them.

“A lot of things I heard about water today were new to me, but I can understand it,” said Oswalt. “My issue is energy costs. Right now I am irrigating but I feel like I am pouring money down a hole because of my energy costs. I am hoping I can recover those cost with the price of cotton, but I don’t think that will work.”

Oswalt said he wants provide for himself some protection against those energy costs. He cannot now.

“Out here in the West we call them water wrecks. We need help to minimize the risks against the biggest variable we have—water availability,” said Borba.

Earl Williams, president of the California Cotton Growers and Ginners Association said so far the cost-of-production insurance idea has been 18 months in the works.

“It offers real promise for the West,” he said. “The process is moving very slowly, but we have the support of some key Congressmen from the West and we hope a breakthrough is at hand.”